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Smearing LNG

February 12, 2018

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A SUSTAINED campaign against the long-term LNG deal that the government signed in 2016 continues unabated, with the Supreme Court now taking up a petition to decide whether the terms of agreement are disadvantageous to Pakistan. The campaign appears to be politically motivated mainly because the reasons being advanced to cast the deal in a bad light are without merit. In one place, for example, one hears the detractors complain that the price at which LNG will be purchased by Pakistan is too high. That price is 13.37pc of the prevailing cost of oil in the market. But each time, the comparative price the detractors pick up to make their case is either from the spot market, or from agreements signed long after the original deal with Qatargas. This is entirely wrong, because spot market prices vary a great deal, and if they are lower at one point in time, they can be much higher at another as they were in the preceding two months. In fact, in recent spot market tenders, Pakistan reportedly ended up saving $76m because the spot prices at which the supplies were contracted were higher than the price from Qatargas.

The two subsequent long-term supply deals that were signed in January 2017 about a year after the Qatargas deal were indeed lower, but there is also nothing unusual about this. The price of long-term supply of LNG varies from month to month, depending on the outlook prevailing at the time, as well as the creditworthiness of the buyer in LNG credit markets. The Qatargas deal was the first that Pakistan signed for the long-term supply of LNG, and as such it would necessarily carry a slight premium. Secondly, the outlook on LNG demand turned negative down the road, further driving the price down. But now many LNG journals are forecasting more robust demand as India enters the markets in a bigger way, so future contracts may come with a higher price tag. Unlike fruit and vegetable markets, LNG pricing is a complex matter and the markets operate in ways the layperson has difficulty in understanding. Pakistan paid a heavy price for politically motivated smears against the first LNG deal in 2006 that caused the entire project to collapse. For a decade after that, the country was gripped by crippling gas shortages. It would be a monumental folly if that story were allowed to be repeated.

Published in Dawn, February 12th, 2018